Crypto

Traditional security measures are not enough for cryptocurrency.

BeinCrypto spoke with Mark Taylor, Head of Financial Crimes at CEX.IO, about KYC for Crypto. how these protocols will change and what the global rules might look like.

Cryptocurrency exchanges are familiar with the confusing, complex and time consuming world of regulation.

As the crypto space gained a reputation for fraud and criminal activity, legitimate exchanges needed to step up their protocols. This helps to ensure the protection of customers and avoid the involvement of the exchange itself in possible illegal activities.

However, for the cryptocurrency market, different countries expect different protocols. This turns out to be a nightmare for international exchanges.

Great KYC

When it comes to financial institutions, one of the most important and well-known security features is Know Your Customer (KYC).

In the early days of cryptocurrency, centralized exchanges did not always include this feature. However, jurisdictions have become more aware of the cryptocurrency market.

As a result, these requirements have become the norm for the exchange to provide its services without facing regulatory issues.

According to Taylor, when it comes to cryptocurrency, these processes are not very different from those implemented by traditional financial institutions. Indeed, as with traditional finance, protocols must be approved by the regulator.

“When considering such differences between traditional financial KYC and cryptocurrency KYC, there may be debates about cutting edge technology and biometrics, but neither is really the answer to the KYC problem. If regulators disagree with the industry on their effectiveness and adoption – explains Taylor.

Interestingly, as e-money markets emerge, Taylor explains that traditional institutions adhere to their improved technology standards.

“Traditional financial services certainly don’t want to be outdone and also appreciate the benefits of new technologies. “

“They are now using the same technology and approach as emerging markets such as cryptocurrency and e-money / open banking,” he explains.

However, Taylor notes that these are only parts of the bigger picture. As KYC responds to criminals, updated rules and technologies are simply an opportunity for criminals to find new ways to get around them.

“Truly effective and comprehensive CDD processes in general, monitoring what our clients do after they go through control, understanding their actions and justifying these activities is more important than ever. “

“Using old-fashioned controls is about as effective as a chocolate kettle.”

Adapting traditional security measures to cryptography, or any new industry, is not ideal, Taylor said. As he explains, if this is an agreed method, then normative standards are needed. However, using outdated methods means that criminals already know how to get around them.

“Therefore, introducing them into any new industry, not just cryptocurrency, is like putting reputable criminals and money launderers with an old puzzle that has already been solved. This is not new to them, and therefore they already know how to abuse and circumvent this control, ”he explains.

“Hacks and digital attacks are now part of the world we live in, and using legacy controls is about as effective as a kettle of chocolate. “

However, despite possible drawbacks, he recognizes that these processes need to be followed.

Reach out to others in isolation

The problem that some are raising is that KYC tools do more than just protect against criminals. They also block access to those who need it the most.

However, for refugees and stateless persons, this process is not possible. This is because they do not have access to the government documents they need to verify your identity. Due to their status, it is difficult, if not impossible, to get approval from a centralized crypto exchange.

For Taylor, the problem boils down to what actually needs to be solved in order to solve this problem. He argues that it becomes clearer where the decision should come from when considering the purpose of the tools.

This relates to the purpose of KYC besides verifying a person’s identity. Law enforcement agencies are more likely to use KYC information to find people when they need it.

“Stateless persons or refugees wishing to enter these markets must meet the same criteria. If we do KYC or some new KYC method that accepts everything, is that enough to effectively locate these customers if the authorities want it? This is a criterion that regulators and law enforcement will have to meet before allowing KYC to be large enough to accept this category of people, ”he explains.

Accordingly, he sees the work of eradicating statelessness by organizations such as UNHCR as key to the process of integrating excluded people into the system.

“I hope that organizations like UNHCR and its partners will succeed in their mission, and just as cryptocurrency is regulated and welcomed, stateless persons and refugees can also be accepted into the modern financial system, which should be their modern right. …

There is a lot of room for Taylor to expand these security tools beyond increasing the number of people they reach out to.

“The KYC tools of the future are limited only by our imagination and our technology. “

He acknowledges that this will not depend on crypto exchanges, but on regulators around the world. However, as he ponders the direction in which these tools will evolve, he foresees technological growth and improvements.

Looking at modern biometrics and facial recognition technologies, he sees that they will expand and improve in the future.

“For example, if we receive a scan of a fingerprint, how can we be 100% sure that it belongs to this person? Then we come to the question of central databases, but also to the broader philosophical question of liberties and the individual right to privacy.

“Of course, there are now residence permits and biometric identity documents and I see them becoming commonplace. We may have chemical and biological identification (DNA) in the distant future, but that also raises the same questions, ”he explains.

Global KYC standards are still under discussion

However, while Taylor sees how technology is driving improvement, he has no hope of global financial safety rules.

“Global standards in any form of regulation, KYC or otherwise, would always be welcome if they could be harmonized with industry and governments around the world. “

“This is one of the most challenging aspects of running an international financial business: dealing with different world rules. At a high level, most of the rules currently in force for governments try to do the same things. Reduce exposure to customers, protect customers, be effective and efficient, and reduce the risk of abuse by attackers, money launderers and terrorists, ”he said.

“However, who would have thought that the same ultimate goal could be achieved in so many different ways! So if we could agree on KYC standards and what is acceptable and what is not, that would be a game changer for regulated organizations. This will lower costs and improve the efficiency and quality of customer service.

However, Taylor does not see this.

“Call me a cynic, but I really don’t see the governments of the world coming together and establishing an agreed framework that is the same worldwide, or even similar enough to allow companies to have the same approach and one process. “

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